Rise in corporate profits spells inflation

Dr.Irwin Kellner

NEW YORK (CBS.MW) -- The sharper-than-expected jump in corporate profits during this year?s first quarter is good news and bad news.

Costs of raw materials have
begun to rise. Oil?s increase is well known, but many other raw materials? tags
have moved higher as well.
Biggest annual earnings jump since 1993

This is good news, by itself, for it is the biggest yearly jump in earnings since 1993. It is even better news when you consider that this rise beat analysts? expectations by six percentage points, according to First Call.

Why was the Street so cautious? For one thing, sales slowed. For another, costs rose.

Cost of raw materials is up

In particular, costs of raw materials have begun to rise. Oil?s increase is well known, but many other raw materials? tags have moved higher as well.

The Commodity Research Bureau?s spot price index for industrial raw materials has jumped 3 percent in the past month alone. The same goes for foodstuffs.

Meanwhile labor costs, which represent two-thirds to three-fourths of the average firm?s total costs, are also on the move.

Total employee compensation jumped 4.6 percent in the first quarter from the same period the year before. That was one of the biggest increases in the past ten years.

And while worker productivity was up a respectable 3.4 percent over the same period, it didn?t rise enough to offset the jump in compensation, so unit labor costs rose as well.

On the sales side, revenues rose by 17 percent over the same period of 1999, far less than the jump in profits. With costs rising, this increase in profit margins clearly indicates that companies were able to raise selling prices -- and make them stick.

The National Federation of Independent Businesses says that the number of firms reporting higher average selling prices doubled in both March and April.

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